Portfolio standard deviation and diversification: You are asked to give financial advice to a mutual fund manager. The fund has had a history of investing in an equally-weighted portfolio of 50 stocks and is considering cutting down the number of stocks to 10 or 20. You assume that all stocks the fund is considering investing in have the same standard deviation of 40% and that the correlation between each pair of stocks is identical and equal to 0.25.
a. To start your analysis, you calculate the standard deviation of the equally weighted portfolios with 10, 20, and 50 assets.
b. Given your answers to part a. what is the advice that you give the mutual fund manager?